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Information Asymmetry, External Certification, and the Cost of Bank Debt

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This paper examines how the cost of bank debt reflects public information about borrower quality, and whether such information complements or substitutes the private information of banks. Using a sample of small business loans, and the award of a competitive public subsidy as an observable positive signal of external certification, we find that a certification is associated with a lower cost of debt for the recipients if the amount of private information of the lender is low. As the bank accumulates more information over the course of the lending relationship with a borrower, public information loses importance and no longer has a significant effect. Our results highlight a potential positive effect of external certification, and suggest that public and private information can be substitutes in the pricing of bank debt.

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  • Andrea Bellucci & Alexander Borisov & Germana Giombini & Alberto Zazzaro, 2022. "Information Asymmetry, External Certification, and the Cost of Bank Debt," CSEF Working Papers 657, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:657
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    Cited by:

    1. Fan, Wei & Ying, Qianwei & Meng, Guo, 2023. "The signaling effect of policy loans: Do commercial banks follow up or stand by?," Finance Research Letters, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Information; Financial Contracting; Interest rate; SMEs Financing.;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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